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The three real estate investment trusts (Reits) in India—Embassy, Mindspace and Brookfield—are expected to offer distribution yields of 6-9% starting from financial year 2022 to 2024, along with 12-18% capital appreciation, according to a report by ICICI Securities Ltd.

This will be driven by incremental vacancy levels rising by 200-300 bps in the first half of FY22, and building in a recovery towards the end of the third quarter.

According to the report, Indian Reits saw strong rental collections of over 99% in Q1FY22 and were able to achieve healthy re-leasing spreads along with contractual escalations.

“However, overall portfolio vacancy levels increased by another 100-200 bps quarter-on quarter (q-o-q) owing to continued work-from-home and the second covid wave leading to deferment of leasing decisions by occupiers," ICICI Securities said in a recent report.

While vacancy levels may rise further in Q2FY22, the brokerage expects this trend to reverse from H2FY22E assuming that the pick-up in vaccinations is accompanied by a gradual return to offices.

After the onset of the first covid wave from March 2020, pan-India Grade A vacancy levels across top seven cities rose by over 300 bps till June 21 to 16.6%.

“In line with industry trends, portfolio vacancy levels rose by 400-600 bps on same-store basis for Embassy Reit, Mindspace Reit and DLF in FY21 while Brookfield Reit retained flattish occupancy levels in H2FY21. This was owing to exits by tenants for scheduled expiries and early exits as well," ICICI Sec said.

The brokerage added that in Q1FY22, overall portfolio vacancy levels increased further by 100-200bps q-o-q on same-store basis for Brookfield Reit, Mindspace Reit and DLF, while Embassy Reit retained flattish occupancy levels.

ICICI Sec noted that the commentary from Reit managers and other large office developers indicate that leasing discussions which were on hold owing to the second covid wave have now been revived again with existing occupiers talking about potential expansion and tenants who were looking to surrender space earlier looking to retain and possibly expand space.

“With three Reit listings in India, the door has been opened for more potential Reit listings from FY22E onwards," ICICI Sec said.

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